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Farm Credit gets boost from downgrade

Farmers who borrow from the Farm Credit System don’t need to join the panic on Wall Street yet. If anything, the volatility in stocks is making bonds more attractive to investors, including those who buy into the nation’s farmer-owned agricultural lender.

Standard & Poor's was busy Monday issuing more downgrades to debt issued by entities that have ties, no matter how strong or weak, to the federal government. The Farm Credit System was just one of the affected institutions. The S&P rating of its long-term debt dropped a notch, from AAA to AA+.

But by late Tuesday, the effect was the opposite of what economists have predicted. If bonds are considered of lower quality, the value of the bond is supposed to fall. The yield—in this case the interest rate the System pays to investors—would be expected to go up.

Doran checked the bond rates on the System's trading floor, which is located at the Funding Corporation’s headquarters in Jersey City, New Jersey. Last Friday, the interest cost on the System’s two-year debt was 45 basis points (or 0.45%), he said. That was before S&P announced the downgrade of U.S. debt last Friday. On Monday, shortly after the U.S. downgrade to AA+ was followed by the same rating for Farm Credit System debt, its interest cost rose slightly, to 48 basis points. But Tuesday, after the Federal Reserve’s announcement that it will not intervene to strengthen a weak economy, the interest cost of Farm Credit’s two-year debt had fallen to 40 basis points.

The System’s longer-term five-year debt saw a similar pattern, with interest costs at 1.54% (or 154 basis points) last Friday. It rose slightly to 1.57% after the S&P downgrade of system debt on Monday, and then declined to 1.36% late Tuesday.

“Typically, when people think of a downgrade, it’s in response to poor performance or financial problems,” she said. “But the Farm Credit System is probably in the best financial condition we've seen in a very long time.”

The Farm Credit System reported combined net income of $982 million and $1.986 billion for the three and six months ended June 30. That reflects $100 million more in the second quarter than in the previous year and $302 million better than the first half of 2010.

But, because the Farm Credit System is a government sponsored entitity, with the expectation that the federal government would come to the aid of the system in tough times, its debt rating can’t be higher than that of the U.S. government, Gill and Doran said.

Gill said that there has been some confusion between the Farm Credit System and Farmer Mac, a separate entity. Farmer Mac provides a secondary market for farm mortgages issued by banks. But its debt is not rated by Standard & Poors and other rating agencies.

But, because the Farm Credit System is a government sponsored entitity, with the expectation that the federal government would come to the aid of the system in tough times, its debt rating can’t be higher than that of the U.S. government, Gill and Doran said.

Gill said that there has been some confusion between the Farm Credit System and Farmer Mac, a separate entity. Farmer Mac provides a secondary market for farm mortgages issued by banks. But its debt is not rated by Standard & Poors and other rating agencies.